pay, meaning profits are not dependent
on government reimbursement. Fourth,
a recent law change makes possible the
RIDEA joint venture structure that
allows REITs to reap financial benefits
from rent profits but leave the day-to-day
operations in the hands of experienced
operators.

What common denominators
determine which operators attract the
interest of REITs? Well-established,
respected providers with a history of
good operations and margins, high
customer service ratings, reputation
for innovation, quality outcomes, and
proven ability to drive growth over the
long term, suggests Robert M. Main, a
research analyst with Saratoga Springs,
New York-based investment firm Morgan Keegan & Co. Inc.

Another key factor may be location,suggests Charles J. Herman Jr., executivevice president and chief investment of-ficer of Toledo, Ohio-based Health CareREIT, which is looking to consolidate itsassets primarily in East and West Coastmarkets and the 31 top metropolitanstatistical areas (MSA). “In general, wehave found there are higher barriers toentry, and these tend to perform well overtime,” Herman notes. To that end, HealthCare REIT has executed mega-dealswith, among others, Wellesley, Massachu-setts-based Benchmark Senior Living,Irvine, California-based Silverado SeniorLiving, Seattle-based Merrill Gardens,and Mount Laurel, New Jersey-basedBrandywine Senior Living.

the operators. In all cases, they werehigh-quality, best-of-class operators.”Educating oneself about a poten-tial partner also is crucial, and that canmean studying and communicatingwith a company for years before pullingthe trigger on a merger or acquisition,especially if both are public entities, saysDebra Cafaro, chairman and CEO ofChicago-based Ventas. For example, theREIT’s $7.4 billion purchase of Nation-wide Health Properties (NHP) last yearstarted six to seven years ago with con-versations between both entities beforeVentas’ board of directors decided thatthe strategic combination made sense forNHP shareholders.

“You really have to understand a com-pany, what its pros and cons are, how thatcompany fits with your own company,and what it brings to your own com-pany,” Cafaro says. “What are its flaws, itsAchilles heel? The art is understandinghow to overcome any obstacles and prob-lems, whether they are in deal structureor tax structure, and really understandingwhat that company adds to Ventas andwhat the combined enterprise and itsprospects will look like.”In the case of what NHP broughtto Ventas, benefits included scale, anincreased rating from three rating agen-cies, more diversification, a tremendousmedical office business, and lowered debtcosts, she adds. Other recent big deals forVentas include its $3.1 billion acquisitionof 117 Atria Senior Living communities.

How to Prep the Canvas

Health Care REIT’s $890 million
RIDEA-structured joint venture with
Benchmark started with Chairman and
CEO Thomas Grape receiving a phone
call in August 2010 from Herman. Grape
and Herman had known and liked each
other for 20 years, including sitting on
the ALFA board together. Both say they
had great respect for each other’s businesses, but never had occasion to partner.
Then Benchmark’s biggest financial
backer, the Australian GPT Group, had
announced a desire to exit from all its
American ventures.

“I knew [Benchmark] had a high-quality portfolio and was known to pro-vide a very high quality of care,” Hermansays. “We liked the markets it was in.”As soon as Grape spoke to Herman,